I try to learn more in depth about topics that interest me. I was reading about the Great Depression, but it is so hard to understand for me what exactly cause it, as I read it, it feels like a mix of fancy words that don’t tell me much (likely due to my lack of knowledge and english not being my 1st language). So, could anyone explain me in simple words what exactly cause the Great Depression?
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People invest when they think the economy will do well – more customers that will buy things. Things were booming in the 1920s, so lots of investment. Stocks went up, more people started buying stocks as an investment just because “stocks always go up, so it’s easy money.” They even borrowed to invest. Then stocks fell. Instead of easy money, it was lost money. People who borrowed a lot were wiped out.
Normally, this just impacts the people speculating. But businesses in general worried about a downturn. Some banks loaned so much that they failed. Some banks failing led people to try and pull money out of their bank, which caused other banks to fail. Businesses saw banks failing and worried more, so laid people off and lowered production, as they expected a downturn. This caused more economic trouble, because unemployed people can’t buy things.
It created a cycle of things getting worse. “Deflation” happened, which meant things started getting cheaper. Good, right? No, actually bad – because then the best thing to do with your money is…not spend it. If a car costs $500 today but will cost $490 in a week, why not wait? If it costs $450 in a month…keep waiting. Don’t buy things. Sit on your money.
All that caused a cycle of business production to drop a lot, which caused layoffs, which caused more production to drop…
And it was fixed by getting things to stop dropping and turn around through spending money and getting people to expect that production will increase and costs will start to go up, so better to buy now. The government ordered big construction projects (and little ones) to help start spending, plus hired lots of people on public works jobs.
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